Interpretation of accounts

Interpreting financial statements usually includes comparison — that of one company with another or for the same company over a period of years to examine performance and trend. Other comparisons may include those on an interim basis, with published industry average figures.

Users of accounting information are interested in a number of concepts, which include:

  • profitability;
  • liquidity;
  • management efficiency;
  • risk;
  • shareholder interest.

    The purpose of this article is to focus on the latter two; risk and shareholder interest.

    Before we consider risk in the form of medium and long term solvency ratios we need to look at the various forms of long term finance and highlight their priority to distribution of profit.

    Source of finance Priority in relation to profit
    Secured loan stock Interest must be paid regardless of the level of profit.
    – debentures

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